Tata Sons-Jet Airways deal only if Naresh Goyal gives up board seat

Tata Sons board meet to discuss the proposal today, the Jet brand may be phased out

In the first formal step towards a possible acquisition of Jet Airways, Tata Sons will on Friday take up the proposal at its board meeting. Sources close to the group said the discussions would focus on achieving scale in Tatas’ aviation business through investments in rival Jet. They pointed out that a deal would hinge on Jet founder Chairman Naresh Goyal relinquishing his board position even if he was to retain a minority stake in the business.

It is also learnt that since the Tatas are looking at extending the reach of Vistara (a joint venture with Singapore Airlines), the group could possibly phase out the Jet brand in the case of a deal.

Sources indicated that a decision on Jet acquisition was unlikely at the Tata Sons board meeting on Friday, but an in-principle nod to consider the proposal within some parameters was a possibility. The process of due diligence had been initiated, they confirmed. Even if the deal fructifies, it will take time as it would be a complex transaction with several players involved, including Jet Airways partner Etihad Airways, people in the know said.

The group’s holding company, Tata Sons, owns stakes in two operating airlines in India – Tata SIA Airlines (which flies under the Vistara brand) and low-cost carrier Air Asia India (a joint venture with Malaysia’s Air Asia).

Insiders said Tatas were keen to buy out the entire 51 per cent stake of Goyal. But even if he was to retain a minority stake, the Tata group does not want Goyal or his representatives to remain on the board after the acquisition, a source said. At present, both Goyal and his wife Anita are on the board of Jet Airways.

Those driving the deal believe that an acquisition such as Jet would help the group be in sync with Tata group chairman N Chandrasekaran’s objective of becoming a market leader across businesses. In fact, the proposed acquisition of Jet is being compared with other ambitious transactions that the Tatas struck earlier such as Corus Steel and Jaguar Land Rover under then chairman Ratan Tata. Those acquisitions enhanced Tatas’ global presence and strengthened the group’s balance sheet by billions of dollars.

Although Tata Sons group CFO Saurabh Agarwal is spearheading the talks, Chandrasekaran (or Chandra as he’s known) is taking personal interest in the matter.

When contacted, a Tata Sons spokesperson declined to comment. A Jet Airways statement to the stock exchanges said the reports that the company was in talks for a merger with Tata SIA Airlines were “speculative”.

Post-merger, the Tata SIA Airline would add 124 aircraft to Vistara’s 20 aircraft fleet. A deal would push up the merged entity’s market share to close to 24 per cent. In addition, Jet Airways has 225 Boeing 737 Max on order. ‘’A fleet rationalization exercise will be undertaken once the merger announcement is made,” one of the sources said. The acquisition will give additional slots to the merged entity to expand its network in India and abroad, he added.

For Jet Airways, a stake sale to a financially strong conglomerate makes sense as its financial metrics have been deteriorating in the past few quarters. The company owes money to its lessors, employees and to other suppliers. It has also asked its employees to take a salary cut and has delayed salaries in the recent past. Its lenders have asked the airline to give a detailed plan on how it plans to repay its gross debt worth Rs 84 billion as of September 2018.

Analysts said with yet another quarter of Rs 10 billion-plus loss, the net worth of the airline had deteriorated further. Also, scheduled debt repayment of Rs 20 billion in the second half of FY 2019 had made matters worse, they said.  “Although Jet Airways has been managing positive cash flow through delays in vendor payments/higher lease incentives, these measures are not sustainable and will fall short, in any case. Any default on debt would lead to lenders dragging the company to NCLT, resulting in a potential shutdown of operations,” said Jal Irani of Edelweiss Research in a note to its clients on November 13.

“Goyal does not want a repeat of Kingfisher Airlines. It makes sense to exit with a premium rather than get into a debt trap,” said an analyst asking not to be quoted.

Even as Jet Airways is taking steps to cut costs, it is not keeping pace with its liabilities. In its September quarter results conference, the airline said on Tuesday it planned to sell six Boeing 777 aircraft to clear its aircraft-related debt of Rs 18 billion and then lease them back.

As for Tatas, acquisition of Jet Airways will help them leapfrog in the aviation business, according to an expert. “Otherwise, it will take Vistara four to five years to scale up its operations,” he pointed out.

One of the factors which could influence the merger between the two airlines is litigation. The Federation of Indian Airlines (of which Jet Airways is a member) had moved the Delhi High Court in 2014 challenging the grant of operations permit to Tata Singapore Airlines (Vistara) and AirAsia India. Separately BJP leader Subramanian Swamy had filed an application in the petition seeking a status report on the ongoing Central Bureau of Investigation probe against AirAsia India.

“The civil aviation ministry has said there was no violation and all procedures were followed in grant of permit. However, should the case go against the Tatas and if they lose the permit they would be able to keep the airlines running with Jet Airways permit,” an aviation industry observer said.